Wayfair shares slide as the online furniture retailer posts a bigger-than-expected net loss, with no sign of profits in the near future

Wayfair,
W -0.84%
the online furniture retailer, has been one of the most shorted stocks in the internet retail sector. Skeptics have highlighted the company’s growing losses, worsening free cash flow and surging market spending. To their chagrin, however, the stock climbed nearly 40% this year—until its third-quarter earnings report on Thursday.

The company reported a quarterly loss of $1.69 a share, compared with a loss of 88 cents a share a year ago, a wider loss than analysts expected. Revenue, on the other hand, exceeded estimates, reaching $1.71 billion, compared with $1.2 billion a year ago. Still, investors sent the stock down 17% Thursday morning. No doubt short sellers felt vindicated.

The selloff may be partly due to the stock’s sharp climb so far this year, which raised the stakes for the third-quarter report. But the bigger problem is Wayfair’s poor economics. Though the company claims to have mastered the art of selling and delivering furniture, it shows no signs of doing so profitably. Its free cash flow for the quarter was negative $58.8 million, more than triple what the outflow was for the same quarter last year.

In fact, the company hasn’t been able to beat earnings estimates in any of the past four quarters, though it consistently does so on revenue. These are related.
Daniel McCarthy,
a marketing professor at Emory University, calculates that the company’s customer-acquisition cost has jumped to $86.8 per customer in the third quarter—a new high. It is spending more money on acquiring customers than it is getting back.

The company has tried to pin some of these issues on growing pains in the international business, but as Mr. McCarthy points out, Wayfair’s adjusted margin of earnings before interest, taxes, depreciation and amortization in its U.S. business was still at its worst level in three years.

Meanwhile, competition in the sector is ratcheting up.
Amazon.com
is building out its logistics network, with warehouses to handle furniture, one of its fastest-growing categories.
Walmart
and
Target
are similarly investing in e-commerce and logistics, leaving them better positioned to deliver furniture. Meanwhile traditional furniture retailers such as
Restoration Hardware
are improving their online sales.

Wayfair needs to show investors that it has a path to profitable growth. Their patience may be waning. If it can’t, the company’s best option may be to look for a buyer.